PERE Tokyo: Quality real estate assets will prevail over cycles

The real estate cycle is of less concern than structural changes in the global economy, as assets with good fundamentals can survive a downturn, according to Japanese investors who spoke during PERE’s annual conference in Tokyo.

Kiyosei Sugioka, head of alternative investments at Tokyo-based ORIX Life Insurance Corporation, remained unfazed by what many in the industry are expecting will be an imminent correction in the real estate market. Speaking during the closing panel of the event, which attracted more than 250 delegates, Sugioka said the organization was taking a long-term perspective of the market and that good quality assets would withstand recessionary pressures.

However, he said it would avoid investing in funds with exposure to the retail sector because of changing consumer behavior globally. A UBS report in April suggested that 75,000 more stores would be forced to close by 2026, partly due to the rise of e-commerce.

Sugioka said a key focus for Orix would be to diversify its investment portfolio by looking for growth outside of Japan. He told the panel that the ¥1.9 trillion ($17.5 billion; €15.7 billion) life insurance company was in the process of building its alternative investment platform, and that it currently has 3 percent of its portfolio invested in domestic real estate with the remainder in fixed income.

Koji Ohashi, manager at Tokyo-based pension fund Fuji Xerox, also had a neutral attitude on the real estate cycle and said his organization would continue to diversify its investments. However, he said it would not invest in the UK until there was greater clarity about the direction of Brexit. He added that if the current uncertainty in the UK continues, the fund might consider excluding the UK from its potential European mandate.

“We will continue to invest in the US because the products are more diverse there,” said Ohashi. As a pension fund, Fuji Xerox is taking a conservative view on investment due to its long-term liabilities. It has so far only invested in Japanese private REITs, US public REITs and US open-ended core funds. Ohashi said that since 2015, it has increased its real asset investments from 5 to 10 percent of its total portfolio. It has not disclosed the size of its total assets under management.

Shigeru Yagi, director of real estate investment at Tokyo-based pension fund Pension Fund Association, said he thought the real estate cycle was important. However, he added that finding “very good” real estate assets was even more important in building a long-term and stable investment portfolio.

Yagi said the ¥11.5 trillion pension fund had invested ¥80 billion in domestic real estate and would consider expanding its real estate exposure overseas. He added that he prefers to invest through separate accounts with good managers where he can monitor the assets closely.

Shinji Kawano, head of overseas property investment at Tokyo-based Tokio Marine Asset Management, told the audience that many Japanese institutional investors would continue to prefer multi-sector funds for the sake of diversification.

“Many pension funds are not sure what exactly they want at the moment, so they will spread and expand the portfolio across different regions and sectors,” said Kawano.